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Chapter seven: The traditional approach to overheads - Coggle Diagram

- - - - Administration overhead:
        This classification includes salaries of administration staff, rent of administration buildings and accounting fees.
- - - - Step 3 - Re - apportionment Re - apportion support cost centre overheads to productive cost Centre
        
        Step Four - Absorption Absorb overheads into product costs using a calculated overhead asportation rate
        
        Step one - where possible,allocate overheads to spefici cost cnetres.
        If the benefit arising from incurring an overhead cost is received by a single cost Centre, the cost can be allocated in its entirety to that cost Centre. For example all of the maintenance cost may relate fully to the maintenance department.
        
        Step Two - Apportion general overheads to cost centres.
        If more than one cost centre received benefit from the overhead cost incurred then that cost must be apportioned in an equitable manner between the relevant cost centres.The apportionment base chosen is a subjective decision but it should bear some relationship to the nature of the cost.
        
        Step 3 - Re-apportion factory support cost centres overheads to production cost centre
        Business which re-apportion support costs dos o for one or more of the follwoing reason:
        
        To provide accruate product cost information.
        
        To improve decision about resource utilization
        
        To ration limited resources
        
        Step four - Absorb overheads into product costs
        After the apportionment is complete , overheads in the production cost center's are absorbed into the product costs .This involves selecting an absorption base and calculating an overhead absorption rate.
        The overhead absorption rate for each department can be calculated a number of different ways , for example
        
        Based on number of units
        
        % of material costs
        
        % of labour costs
        
        % of prime cost
        
        Based on machine hours
        
        Based on labor hours